Health insurance in the 1990s.

by Gilfillan, Sally W.

Abstract- The continued escalation of health care costs has become one of America's most serious social and economic problems. It is estimated that the amount large companies spend on health care increases by an average of 22% annually. Health-related spending is currently placed at 12% of the GNP and is expected to reach 17% by the year 2000. Several solutions to this problem have already been proposed and are presently being discussed, including a universal health insurance scheme, an expansion of Medicaid and mandated employer-provided health insurance. Any discussion of such solutions should consider the limited resources of small businesses since they comprise 87% of all business enterprises in the US. In a recent survey, small-business owners offered several suggestions of their own regarding the health care problem. Among these were the regulation of medical care providers and insurers and a tax reform to spur the establishment of nonprofit health care providers.

A politician's dream is health coverage for everyone. Here are the
proposals and what small business thinks about them. Whatever course is
taken, the CPA will want to be involved on behalf of his or her employer
or client.

Health care costs and insurance are a social and economic problem. Due
to complex factors, the cost of health insurance has increased
dramatically. At the same time, health insurance has shifted from a
traditional role of excellent fringe benefit to a new role of necessary
entitlement. The aging of our population, more and better preventive
medicine, new and expensive technology, the effect of malpractice claims
on liability insurance, administrative costs, significant numbers of
uninsured, and inefficient use of facilities and equipment are factors
which interact to intensify two serious problems: health care cost and
health care access.

Our society has become sensitive to the social cost and social injustice
of failing to provide medical care to all who need it. Our medical
community successfully treats many conditions that in the past would
have left persons less productive members of society. Unfortunately,
medical advances are accompanied by significant financial cost and
ethical issues concerning right to care and level of care.

Impact on Business Profitability

The majority of employees, especially those working for firms consisting
of more than twenty-five employees, now expect employers to provide
health insurance. Health care management, including choice of insurer
and benefit plan, cost containment, and administration have become
business rather than individual concerns. Health care costs for large
businesses recently have risen an average of 22% a year and are
currently about 12% of GNP. In 1965, health care consumed about 6% of
GNP. Richard Darman, former U.S. Budget Director, estimated health care
costs will be 17% of GNP by the year 2000. Clearly, these costs will
increase dramatically and quickly in the upcoming years. Cost-benefit
considerations are made more complex by society's unresolved debate as
to access and level of care that we merit.

Proposed Solutions

Our national health care debate revolves around several proposed
solutions to the problems of health care cost and availability. The
following proposals are under consideration both individually and in
various combinations:

* Universal health insurance. This could be administered Federally as in
Canada or by each state in plans modeled after Germany's national
insurance.

* Solutions based on free market theory. Private insurers retain a major
role in market based health insurance; cost control and quality
assurances are left to market forces. These proposals often include
future elimination of both Medicare and Medicaid.

* Adjustment of deductibility and taxation of benefits to either
encourage or discourage types of health insurance.

* Health insurance obtained by individuals rather than employers.

* Mandated health insurance provided by employers has been proposed in
two forms. All employers must provide a basic, mandated level of
insurance and contribute a determined portion of the cost; or employers
must either provide mandated insurance or be assessed a payroll tax to
be used by the government in providing health insurance to the uninsured
population. The latter proposal is known as play-or-pay.

Congress has already considered mandated health insurance based on the
concept of play-or-pay. In 1991, Senate Majority Leader George Mitchell,
with Senators Kennedy, Riegle, and Rockefeller, sponsored a play-or-pay
proposal. This legislation would amend the Public Health Service Act,
the Social Security Act, and the Internal Revenue Code of 1986. All
businesses would be required to offer health insurance to all employees
(play) or pay a payroll tax (pay). Payroll taxes collected from
employers choosing to pay rather than play will be combined with
Medicaid and Medicare into one fund, Americare. Thus, all Americans
would have a form of health insurance; the level was not
specified.

Under play-or-pay, responsibility for health insurance is placed
squarely on the employer and the government, not the individual. This
legislation included provision for special assistance for small and
medium-sized businesses, yet there is real concern in the business
community that assistance would be minimal.

Benefits and disadvantages of play-or-play and other proposed solutions
are currently being debated. Unfortunately, none of these proposals
addresses the critical issue of defining the standard medical care that
is desirable for each individual. These proposals also do not include a
good estimate of future costs or specify how funds will be collected. In
addition, business viability has not been seriously addressed by these
various solutions.

Survey of Small Businesses

Proposed solutions to American health care problems should include an
assessment of the status of small businesses and carefully consider any
anticipated effects of legislation on small businesses, their resources,
and our economy. Eighty-seven percent of the businesses in the United
States are small businesses with finite resources. Legislation that
affects the well-being of small businesses affects most Americans.

A survey was sent to 200 small businesses in an attempt to evaluate
current and anticipated health care and insurance problems, 45 of the
200 responded. The key areas surveyed were: current status of small
businesses and health insurance, the effect that small business owners
and managers anticipate play-or-pay will have, the alternate solutions
to health care and insurance problems preferred by small business, and
general attitudes concerning health care issues.

Seventy-three percent of respondents were businesses located in small
towns or rural areas. These were truly small businesses: 73% have fewer
than 25 employees, 82% had fewer than 50. How these businesses are
coping with health care insurance is important to our economy. Many of
the 34 to 37 million uninsured are working people employed by small
businesses. Small businesses have incentives to offer their employees
health insurance. Firms surveyed find health insurance to be important
in hiring and retaining good employees. More than 75% of the respondents
said health insurance is an attractive benefit; 62% considered health
insurance to be necessary to obtain a stable, productive workforce.
Sixty-nine percent of respondents were currently offering health
insurance to their employees and more than half paid more than 51% of
that health insurance.

Cost Increases: A Serious Problem

Small business is experiencing problems with the cost of health
insurance. Firms surveyed had experienced significant premium increases;
51% had rate increases up to 50% in each of the last three years. Many
firms are just beginning to suffer the combined effects of the recession
and health care cost increases.

A roofing firm reduced its workforce from 18 to 11 employees in the last
year due to the economy. This decline placed the firm in a new insurance
category. The insurance carrier notified the firm that a premium
increase of approximately $26,200 a year was necessary to maintain the
current level of insurance in the new category. Management and employees
spent significant man-hours completing forms to qualify for more
favorable rates under a different plan. To date, none of the employees
has been accepted by the carrier for the plan. This firm is searching
for the usual solution, a new insurer. However, two potential insurers
have notified the firm that an employee's spouse with an adverse claims
history may be uninsurable.

Small businesses appear to be having significant problems with both cost
increases and insurability of certain employees or family members; two
problems which are related. Adverse claims history is one of the causes
of stiff increases in premiums. The frustration and costs of resources
expended in dealing with these problems are significant burdens on
businesses.

Coping with Cost Increases

Small business has coped with health insurance problems by changing the
type of policy offered, adjusting employer or employee contributions,
and changing insurers. Sixty-nine percent of respondents to this survey
have significantly increased the deductible during the last few years.
Many respondents indicated that employee contributions have also
increased. Forty-four percent of these businesses have changed insurers
in the past year. Small firms often change insurers in response to
premium increases. In fact, 40% indicated the change in insurers was due
to a rise in premiums.

A little more than one-tenth of respondents discontinued offering health
insurance due to rate increases, claims history, or insurer
requirements, a small but significant percentage considering health care
costs. Many small businesses may be forced to discontinue offering
health insurance as predicted cost increases become reality. Play-or-pay
legislation may force some of these companies out of business unless the
cost of "pay" is significantly less than "play."

Another Serious Problem

Costs are only part of small business health care problems.
Administration of health insurance is an important concern. Seventy-one
percent of respondents indicated that small business is currently
experiencing problems in administering health care coverage. Sixty-seven
percent indicated that time and resources are not available to sort out
insurers, types of plans, and the costs involved. This problem is
closely related to premium increases and the solution of changing
insurers, a complex and time-consuming process. Evidence exists that a
significant number of insurers offer lower than average rates the first
year with significant increases each year thereafter.

Employee Relations

Health insurance concerns extend to the area of hiring and employee
relations. A third of the respondents reported friction with employees
over health insurance; 44% expected friction in the future. Slightly
more than a third experienced problems with insurability of certain
employees. As a result, several respondents indicated that hiring
practices are affected by health insurance. Over a third indicated
employee health would be considered in reducing the workforce.

These results indicate that an employee's health may become a
determinant of employability in the future. Legislators should consider
this possibility carefully.

Proposed Solutions

Small businesses are as concerned with the paperwork and complexity of
play-or-pay legislation as with cost. Over three-fourths of respondents
were concerned that costs to comply with mandated health insurance of
this form will be significant and paperwork will increase. Eighty-four
percent believed administrative costs will increase. Interestingly, 82%
felt these costs will cause small businesses to find ways around the
legislation.

Any solution to health insurance problems must consider the significant
past and forecasted increases in health care costs. Small businesses
surveyed felt that both health care providers and insurers should be
strongly regulated to control costs. In addition, 40% of respondents
thought our tax structure should encourage the health care industry to
be nonprofit. The profit aspect of health care needs to be considered
carefully.

Although 53% of respondents to this survey indicated everyone should be
guaranteed a basic form of health insurance, many prefer this be
accomplished other than by linking our Federal tax system and employers.
Many also preferred administration by private insurers rather than state
or Federal government. More than half of the respondents would choose
state administration of mandated insurance through non-profit
corporations over Federally administered play-or-pay. A non-profit
corporation would pool small businesses enabling them to deal with
insurers as large groups, thus spreading risks. In addition, the non-
profit corporation would relieve firms of some of the costs and time
involved in health insurance administration.

The Canadian model of health insurance has been often proposed as a
solution. Only 38% of the respondents would prefer national health
insurance on the Canadian model to the play-or-pay proposal. Forty-seven
percent would not choose a Canadian-type health system.

These results indicate that small businesses are feeling the effects of
rising premiums and increasing complexity in administration of health
insurance. However, respondents to this survey do not consider the play-
or-pay proposal to be the best solution. The very real problems that
small businesses are currently experiencing in offering and
administering health insurance have not been addressed. In addition, the
existing regulatory environment that small businesses deal with must be
considered. Legislation should not place additional costs on small
businesses in terms of taxes or administrative costs, especially in the
current recessionary environment. Current and proposed health insurance
systems need to be assessed in terms of the market place and economic
efficiencies.

Tax Code Changes

One solution to businesses' health care problems may lie in changing the
tax code. The IRC has been used, most effectively, to encourage
employers to offer employees health insurance. Instead of enacting play-
or-pay legislation, Congress may be better advised to removed, or limit,
the preferential treatment of employer provided health insurance.
Employer provided health insurance currently is deductible to the
employer and tax-free to the employee.

Possible changes in tax treatment include limiting the employer's
deduction for health insurance to the cost of an identified minimum
benefit plan. However, limiting deductibility is probably not the best
solution. Excess insurance benefits would most likely be considered
payment for employment which is deductible as compensation. Instead, a
limit could be placed on income exclusion. An employee's tax benefit of
exclusion from gross income could be limited to a minimum benefit plan
or eliminated altogether. Health insurance benefits above the minimum,
or all benefits, would be taxable compensation. Limiting the tax benefit
for insured employees could be combined with a tax credit for health
insurance purchased by the uninsured. Tax treatment of the insured and
uninsured would be essentially equal. Removing or limiting the tax
benefit to the employee might ameliorate some of the inefficiencies in
the area of health care, help to control costs, and address issues of
justice and fairness. If employer-provided health insurance is taxable
income, employees will presumably be more careful in their use of health
care and more cost conscious. In addition, employees of certain
businesses would not have a tax advantage available only to employees of
businesses with non-discriminatory plans.

Changes in the tax treatment of health insurance are proposed both by
groups who favor free market solutions and by groups who favor a form of
national health insurance. Those in favor of free market solutions
propose eventually eliminating both Medicaid and Medicare along with
changes in the tax code to make treatment of employees and on-employees
equal. Health care would be reprivatized, and individuals would make all
decisions concerning health care and insurance.

Proponents of national insurance prefer a combination of tax code
changes with health insurance treated much like Social Security. Either
the government or all employers would provide health insurance or all
individuals would be required to purchase insurance and provide proof of
the purchase on the tax return.

Solving Insurance Problems

Health care and insurance costs and availability are areas of concern to
CPAs in both public practice and industry. CPAs in industry will be
increasingly called upon to analyze and propose solutions to health care
problems. Businesses must develop expertise in health care issues to
participate fully in the national debate. CPAs in public practice have
clients, especially small businesses, whose profitability and viability
are seriously affected by current health care problems and proposed
future solutions. Small businesses offer an opportunity for CPA firms to
develop and utilize expertise in the health insurance area.

Therefore, it will be beneficial for CPAs in both public practice and in
industry to be knowledgeable about comprehensive health care management.

Comprehensive health care management includes analyzing past, current,
and projected future health care and insurance costs. Data collection
and analysis are an important part of this process. Review of the
client's current health care administration to determine inefficiencies
and areas that need to be changed may also produce benefits.

Analyzing and controlling health care is enhanced with software obtained
to control and monitor both overall and per employee costs. A review
would be designed to determine if expectations of health care costs and
administration match reality. A wide divergence has been found in
charges of health care providers in proximate geographical areas.
Through reviews of several businesses in an area, CPAs could assemble
information concerning health care providers who provide quality care at
reasonable cost. Thus, the CPA would help the small businesses manage
both the cost and administration of health insurance.

The Debate Goes On

The national debate concerning health care costs and insurance will
continue to be an important discussion over the next years. Current
health care and insurance problems are caused by several factors: shift
in the health care industry to an increasing for-profit focus;
development of sophisticated, costly technology; an aging population;
the rising cost of malpractice insurance; and tax laws. These factors
have changed society's perception of health insurance from a fringe
benefit to a necessity. Because of its complexity, this national debate
will be lengthy. CPA firms have an essential role in this debate. Health
care costs and insurance are areas in which CPA firms can offer
important service to both small businesses and society.

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